A look into the future of the insurance industry
The insurance industry is changing at a rapid pace due to technology and regulation; and therefore insurers need to be flexible and adapt their business models in order to survive.
If insurers need to change their business model in order to remain profitable in this changing industry, what standard do they work towards?
Innovation Group recently released it’s Future Now report, and the research shows that the South African market will adopt the same trends as the British market. However, these changes will have a significant impact on the motor industry.
Telematics may be good for some
Innovation Group Chief Executive Officer (CEO), Glen Mollink says to improve efficiency, meet the demands of today and adapt more rapidly to the needs of tomorrow, innovation is essential. “The tools exist in telematics and big data to do something about traffic congestion and poor driver behaviour. However, this requires the cooperation of motor insurers in South Africa, traffic authorities and vehicle owners. The latter need to be held accountable for their driving habits, and the technology exists right now to achieve this.”
The research also showed an appetite for more flexible policy options. Telematics is set to become a significant disruptor to the South African motor insurance market over the next decade, and is very likely to impact pricing methods across the industry.
This can benefit the industry in the sense that insurers will be able to price their risk appropriately, and refuse to insure high risk clients. This will result in a decrease of claims, which will also decrease the cost of insurance; a cost that can be passed onto the client.
Mollink adds that the successful motor insurers of tomorrow will be making significant investments today in their ability to process huge amounts of data, to be able to tailor premiums to reflect risk, thereby improving margins.
However, pricing methods can also destabilise the industry. There is already a high volume of uninsured cars on South Africa’s roads, and refusing to insure high risk clients will only complicate the problem. If one insurer refuses to insure a high risk client, most insurers will. This will also complicate the problematic challenge of insurer’s motor books being under pressure.
Mollink says, “this is a fine balancing act insurers need to play; they need to manage the data they receive from telematics in such a way that they retain their client base and not alienate future clients. Perhaps refusing insurance to clients based on their risk profile is further off than we think. The likely tactic would be for insurers to insure these drivers, at a significantly higher premium.”
Fleet management opportunity
Through business intelligence systems, of which telematics is a component, the cost of supply chains can be reduced by a considerable margin where fleet managers and supply chain operators are in possession of high-quality data input relating to the vehicle, driver behaviour, time of day and seasonal factors, billing, fuel and maintenance costs, lading, medical history, route-info, and more.
In addition, the report states that once Administrative Adjudication of Road Traffic Offences (AARTO) is implemented, accountability will reside with the company, which will be liable for any sort of traffic infringement by its employees while driving a company vehicle. Management systems will be needed to enforce this.
Motor insurance
Jonathan Holden, Managing Executive of Insurance at Innovation Group, points out that ten years ago, crime accounted for 70% of claims, with accidents and storm damage making up the remaining 30%. Following various initiatives to reduce motor theft and crime, those percentages have reversed with crime today accounting for only 30% and accidents and storm damage making up the remaining 70%.
“Much of this turnaround stemmed from the industry’s establishment of the South African Insurance Crime Bureau’s (SAICB) sub-committee who have been working on organised crime in motor insurance for many years effectively. On the other hand the sharp weakening of the rand and dramatic increase in cost of parts now account for 70% of the cost of repairs,” says Holden.
One other South African Insurance Association (SAIA) initiative to look into certified alternative, but legal parts. Other countries have legislation permitting the use of parts while still in warranty, however, there is no legislation in South Africa therefore, motor manufacturers insist that only genuine parts be used throughout the extended warranty period, thereby protecting their market and profitability.
The high cost of insurance is one of the major reasons why insurer’s motor books are under pressure. Before joining Innovation Group, Holden served on the Board of the SAICB. He points out that as much as 30% of the claims in the industry are fraudulent and this cost is worked into motor premiums.
Alternative distribution channels
The UK has a rich history of direct insurance and has developed to a stage whereby online price aggregators are the major way to compare the costs of insurance in that market. Price aggregation websites have not taken off in South Africa to the extent that they have elsewhere, and the report suggests that a popular route to aggregation being pursued in South Africa is websites only for brokers.
“The Pay-As-You-Go model is an interesting development in the industry and one likely to gain traction over the next decade as it matures and government has more success in channelling people to public transport. It offers the choice and flexibility that many drivers now desire. Essentially, people want to pay for what they use as is being seen in other industries such as cellular providers and software,” says Mollink.
He adds that the elephant in the room for the South African motor insurance industry is the development of products for the mass market. The Financial Services Board (FSB) is proposing to offer new insurance licenses for this market with less onerous regulatory requirements, a lighter form of compliance to the Financial Advisory and Intermediary Services (FAIS) Act and lesser capitalisation requirements, as well as simpler wording requirements. The challenge for the industry is to come up with new and innovative products, particularly in respect of motor insurance.
Editor’s Thoughts:
One of the major challenges with telematics is the level of participation. The public is already sceptical about telematics and the way insurers will use the data collected by these devices. With power being shifted towards the consumer, perhaps insurers will need to look into changing their current business models in order to incorporate it. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
